The Asian giant arm-wrestle: Is India about to beat China at the VC game?

China, by all means, is far ahead of India. Be it the quality of infrastructure, its business-friendly environment and backing from the government — India has a lot to learn from this Asian giant.

It’s no secret that India has always looked at China with a bit of envy, for its astonishing growth over the past couple of decades to become the fastest-growing economy in the world, despite the fact that a large chunk of its people still don’t speak English. According to a recent news report by The Economic Times, prominent Indian startup entrepreneurs have started paying regular visits to cities such as Shanghai and Beijing to pick up business tips from the startups there.

The key advantage for startups in China has always been the enormous size of its market. According to a latest survey, China has an estimated 690 million internet population, with 520 million accessing it via smartphones. In simple words, Chinese startups have been riding high on its huge growth prospects.

Surprisingly, the country has been seeing a downward trend for the past two-three years when it comes to startup investments. According to a report by Ernst & Young, the total VC investment value in Chinese startups steadily declined from US$6.5-billion in 2011 to US$3.5-billion in 2013, while in India, it grew from US$1.5-billion in 2011 to US$1.8-billion in 2013.

According to a latest report by VCCEdge (the research platform of NewsCorp-acquired VCCirlce), investors poured US$853-million into India in the first quarter of 2015 — a rise of more than 2.5 times over Q1 2014.

India is clearly the hotbed for startup activities — evident from the flocking of large VC funds such as Tiger Global, Sequoia Capital, Investment AB Kinnevik and DST Global from Europe, US and Asia in the recent past, who are now more bullish on India than other global markets.

But why are they snubbing bigger markets like China to put their faith in India? Here are four reasons why investors are now more likely to look towards India than China.

1. A level of saturation

Experts feel that China, as a market, has been tapped to its potential. The market is already so grown that there is hardly any room for new players. While Chinese startups have been immensely successful in domestic markets, they are finding it hard to achieve global scale success because of the language barrier (according to Wiki data, only 0.73% of its 1.36 billion people speak English). In that sense, they lose an opportunity to tap growing global markets like Europe, US and India.

This is a point of concern for VCs, who have started looking at alternative markets to invest their capital. India is a bright spot now, as smartphone penetration is growing fast.

As of last year, India has about 310 million online population, of which 140 million browse via smartphones. This shows around three-fourths of the 1.3 billion population still don’t have access to Internet or smartphones. The good news is that the neck-to-neck competition in the smartphone industry has brought down prices, enabling more people to own smartphones.

This presents a great opportunity for startup ventures.

In fact, Chinese business giants like Alibaba have already identified India’s potential and invested massive capital in fast-growing companies like Paytm. Alibaba, which also operates a B2B e-commerce portal in India, realised the next growth opportunity lies in India as the smartphone growth is exploding. According to another report by The Economic Times, Chinese technology startups are squaring off not only against domestic companies in India, but also against each other.

All this indicates that India is on the right trajectory.

2. China has already created market leaders

China is dominated by the likes of Alibaba, Tencent and Baidu, and they are leaders in their respective categories. So, it’s hard for new ventures, especially in the mobile/Internet industry, to start a business and be successful in China. This is why experts say that Chinese startups now have to focus on niche products, instead of picking a mass market product, and then find a new way to attack its business model.

According to Andy Pan, Vice President of DJI (a leading consumer drones maker), instead of boxing themselves into a narrow category, startups addressing niche use cases have the opportunity to make a huge impact.

However, India — as a market — is still nascent, and there are hardly any category leaders here (barring Flipkart or Snapdeal). There is more than enough room for new players. Over the past two years, new startups with innovative ideas have come to the forefront. The existence of multiple players is good news, as it fosters innovation and brings down product and services costs.

“There is still green-field opportunity in India,” says Mukund Mohan, an active angel investor and Director of Microsoft Ventures.

“For foreign investors in startups, China offers many hurdles and they have to deal with a hugely competitive market there. Besides, they face huge language and culture barriers. For many foreign investors, Indian tech and consumer Internet opportunity resembles (the) Chinese opportunity of 10 years ago when many large Chinese companies such as Tencent and Alibaba got started,” says Rajesh Sawhney, Founder, GSF Accelerator.

He sees a clear window of opportunity for VCs to catch Indian startups young and help them grow big — both in the domestic and international markets.

3. India has the largest young population in the world

According to a UN report in November 2014, India has the world’s largest youth population — at around 356 million in the age bracket of 10 to 24 years — despite having a smaller population than China, which has 269 million young people. Developing countries with a large youth population could see their economies soar if they invest heavily in education and health.

In a country like India, where education and health is still a distant dream for many people, startups can play a pivotal role. No wonder India has been seeing increasing innovation in these two segments and investors are pouring millions of dollars into these areas.

The number of young people using smartphones and Internet is fast-growing in India — thanks to the presence of multiple brands.

Another advantage of India is that its young population can speak English, unlike its Chinese counterparts. The existence of multiple domestic languages is the icing on the cake for startups.

4. Indian entrepreneurs are more savvy with US laws and culture

The mass migration of Indian graduates from premier educational institutions like IITs and IIMs, to work in tech majors such as Google and Microsoft in the US in the late 1990s and early 2000s, was a blessing in disguise. Their work experience helped them understand the nuances of the US market. They also realised that the young US population preferred starting their own venture, to working with business behemoths.

This was a great learning for many of the Indian expats in the US and it encouraged them to come back and start their own ventures at home. They also instilled confidence into budding entrepreneurs and encouraged students to drop out of colleges and schools to start their own ventures.

As a result, more people plunged into entrepreneurship and more creative ideas came out of these young turks. They developed niche products that can cater to India and developed markets like the US, too. Thanks to the immense knowledge they acquired from working in developed markets, Indian startup entrepreneurs are far more well-equipped to go global.

However, Chinese entrepreneurs mostly focussed on the domestic market, as they lacked English skills which hindered their growth to developed markets.

This prompted large VCs in the US and other developed economies to come and invest in Indian startups.

Why is India hot?

India is on the cusp of a revolution while in China, the market is already tapped to its potential. Interestingly, a majority of economic activity in India still takes place in the informal sector. For the first time ever, according to a report by Indian think-tank iSpirt, self-employed individuals are able to use technology to become efficient and competitive. For instance, a self-employed driver can now be part of a taxi network and have access to new customers. The numbers speak volumes about the massive opportunities India offers.

According to a report by Indian software body NASSCOM, India is among the most attractive markets, with around 150 million mid-income households. Plus, around 75% of the total population in India are under the age of 35 years. The number of talented young population grew double the size to 5.8 million in five years. So, the time is ripe for software companies to create a big impact on improving government, labour and social productivity.

China, on the other hand, has a decreasing population, and the market is almost tapped to its potential, prompting VCs to look at other large markets like India.

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This article by Sainul Abudheen K originally appeared on e27, a Burn Media publishing partner.

Image by Jonah via Flickr